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Oil’s well that prices well

india Updated: Feb 07, 2010 22:37 IST

Reducing subsidies on petroleum products is a hardy perennial of the Indian political economy. The same debate is carried out every few years. The Kirit Parikh Committee report on oil prices echoes several previous government panels by recommending that the cost of diesel and petrol should be brought in line with market prices and those of kerosene and cooking gas be partly freed. On past record, the Manmohan Singh government can be expected to tie itself into knots over the recommendations and eventually agree to the easiest option — raising petrol prices — and at best tinker with the prices of the others. This is also a well-known formula in New Delhi.

A half-hearted approach to price reform would be unfortunate. This is the most opportune moment to liberalise costs: crude prices are moderate and the government is at the start of its term. Oil price subsidies cost the State-owned enterprises some Rs 300 billion in lost revenue and anywhere between three to four trillion rupees in market capitalisation. This denies India’s rickety energy sector badly-needed investment. This, in turn, imposes long-term penalties, in the form of bad infrastructure and greater oil imports, on the average Indian that will far outweigh the short-term gains of lower prices. Analysis indicates that full implementation would increase inflation by about 1 per cent and that probably only temporarily.

The worldly-wise will argue that most voters do not understand that there is no free lunch. However, the
previous National Democratic Alliance coalition actually practised a petrol price policy that did not attract popular ire. One, it changed prices dozens of times in small doses so there was no shock value. Two, when global prices fell this was passed on to consumers. There is another reason why the government should consider implementing the Parikh Committee recommendations. All the evidence shows that only a fraction of the oil subsidies actually reach the poorest sections of India. The beneficiaries are largely in the middle-class, whether city housewives or landed farmers. Other beneficiaries are smugglers and adulterators. The case for price reform is tight as a drum. The political will for reform, unfortunately, has so far been as viscous as the crude inside.